Dairy farmers haven’t responded with higher milk production, but that could come with the next lactation.

The calendar is moving ever so close to the end of the year, but demand for cheese continues to hold up well. Block cheese prices was able to reach $2/lb., a level last seen in early November 2012. This strength has exceeded expectations for this time of year. December Class III futures contract is virtually priced and it looks like 2013 will have the second highest average Class III prices in history. Early 2014 is indicating a very promising beginning with January poised to exceed the December price.

Higher prices create a greater desire by dairy producers to increase milk production. Feed prices are lower with the best milk/feed ratio since October 2010. Culling has slowed with November dairy cattle slaughter totaling 249,000, down 20,000 head from last year and 28, 000 head from October. This is the lowest monthly slaughter since May. One would think milk production would show significant signs of improvement, but such is not the case. November milk production report showed milk production per cow in the U.S. only 2 lb. above last year.

Much of this slow growth has been attributed to the later summer hot weather and the significant impact it had on cows. Milk production potential is there, but cows will need to move into their next lactation before full production can again be achieved. There are feed quality issues in some areas, but this is being overcome through proper ration balancing. USDA feels there is potential for higher milk production with projected milk output to reach 204.9 billion lbs in 2014.

Higher world dairy prices and competitive U.S. prices certainly have been good for exports. There is concern over the desire of some to see supply management implemented. This could result is the loss of some export business. Other countries want to have a reliable source of dairy products and with possibility of interrupted supply business could suffer. One thing for sure is that we do not want to lose market share that has taken time to build up.

Information is beginning to trickle that current high prices are beginning to uncover some buyer resistance. However, good demand is expected to support prices and keep them from falling out of bed. Although milk production remains higher than last year, current production is improving more slowly.

Rather than a significant amount of excess moving to the vat over the holidays, dryers will be busy taking in and processing as much milk as possible to hopefully catch up on demand. This will reduce the amount moving to manufacturing and may still require price premium over class in order to obtain it.

Cheese plants have been reducing or eliminating the amount of nonfat dry milk added to the vat to increase cheese yields. High nonfat dry milk prices are making the use of powder cost prohibitive and plants are deciding to take a lower yield. This could help in the overall supply of nonfat dry milk, but certainly will not have a significant impact. Strong domestic and international demand keeps prices high.

Now is the time to step in and hedge your milk if you have not done so. Those who are hedged and have been holding and paying margin need to continue to hold those positions. Fence strategies are preferred with purchasing puts and selling calls providing some flexibility.

This is an interesting and critical time of the year. Emotions are running high and there are opinions on both sides. Each producer needs to keep things in perspective. Do not guess on milk prices, but protect milk prices and revenue.

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.

This material has been prepared by an employee or agent of AgDairy LLC and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in commodity trading may not be suitable for recipients of this communication.